Blockchains Could Be the Answer to Fairer Lending Systems

According to
economists at the Bank of America Merrill Lynch, as reported by Business
Insider, when it comes to homeownership,
millennials lag behind every generation before them this century.

A report by the National Association of Realtors shows that
millennials who don’t already own a home are delaying buying one for an average
of seven years. Some of the reasons given for the delay include tighter credit
standards and lifestyle changes. They are getting married and having children
much later than previous generations and also, unlike their parents or
grandparents, millennials come out of college with heavy debts that make it
nearly impossible for them to take up mortgage financing.

When it comes to credit score, this
generation is also left behind, with a study by Experian showing that millennials have an average credit score of
625. This is lower than the one held by preceding generations at that age when
baby boomers had an average credit score of 709 and “Gen Xers” had one of 650.
Consequently, the majority of millennials cannot access the traditional credit
facilities including home financing, therefore leaving them with no option but
to rent or live with their parents.

However, with the advancement of
blockchain technology, this is poised to change. Through the technology, anyone
anywhere in the world can raise financing from peers without having to rely on
the traditional credit scores and the often heavily bureaucratic conventional
mortgage processes.

Blockchain solutions such as Homelend are
making it possible for borrowers to directly reach lenders without depending on
any intermediary and with no paperwork. The whole process is safeguarded
by smart contracts to ensure that all parties in the deal adhere to their part of
the bargain. According to Aneeza Haleem, a senior account manager at Cognizant Technology Solutions, blockchain-powered
peer-to-peer mortgage financing significantly reduces the costs involved in the
mortgage process.

Traditionally, each step of the
mortgage process involves charges in legal, financial and transactional fees,
which usually add up to between 1 and 2 percent of the property value. However,
with blockchains and smart contracts, there are no costs, given that the
process does not involve intermediaries. Moreover, blockchain solutions can
eliminate the tedious paperwork and the time it takes for a mortgage to be
approved. According to Realtor.com, it takes around 30 days on average for a mortgage to be
approved through conventional means.

The traditional credit scoring
mechanisms are not only often slow and costly but can also be seen as unfair in their assessment of borrowers’ qualifications. A big
challenge with the conventional credit scoring system is that it is based
mainly on borrowing history, which most first-time home buyers do not have.
With blockchain technology, big data analytics and IoT, the type and amount of
data analyzed to determine a credit score can be expanded to include a wide
range of activities and therefore provide everyone with a more detailed and
balanced credit score.

The role of distributed ledger
technology is to ensure that a process is transparent and is not prone to
manipulation. Also, in these applications, credit history can be accessed
anywhere and borrowers can obtain financing wherever they are.

When it comes to user data safety
and verification, the blockchain-powered mortgage system also has strong
promise. In the past, credit scoring firms and mortgage companies have been a
top target for hackers, with the most recent incident involving Equifax, the
world’s largest credit reporting agency. According to CNBC, the Equifax data breach affected over 143 million Americans —
more than 40 percent of the entire U.S. population.

To avoid incidents such as what
happened with Equifax, blockchain technology can be a foolproof solution where
lenders can verify the identity of borrowers without putting their data at
risk. Blockchain innovations such as Spring
Labs are making it possible for
lenders, banks and data vendors to easily exchange and verify data without any
party taking a central position. The data is therefore safe, given that the
decentralized nature of the blockchain makes it nearly impossible to hack.

Bloom is another example of a
blockchain solution that seeks to streamline the credit scoring process while
ensuring high-level data privacy and safety. The protocol consists of three
parts, which include BloomID, BloomIQ and BloomScore. While BloomID is
responsible for creating a unique global, secure identity, BloomIQ helps in
reporting and tracking current and historical debt obligations that are tied to
a user's BloomID. Then BloomScore rates users depending on the data provided by
BloomIQ.

For those without a credit score,
Bloom is planning to introduce the first global credit card open to anybody to
allow users to build their credit history. However, unlike Homelend, the project
does not facilitate peer-to-peer lending.

As blockchain technology is gaining
traction, it will continue disrupting financial processes and wide-ranging
industries, changing the economic landscape. Ideally, it will bring in more
opportunities and will equalize the playing field like never before so that
more people will be able to experience freedom in many areas, some which have
yet to be imagined. The transparency, security and decentralized nature of a
blockchain has a lot to offer the world, and it's exciting to think of the
possibilities in store.